The Senate passed HR 748, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Law“) on Wednesday, March 25, 2020. Among other stimulus measures, the CARES Act authorizes $ 349 billion in partially forgivable SBA loans under Section 7 (a) under the”Paycheque Protection ProgramWhich loans would be issued by qualified Small Business Administration (“SBA”) lenders. It is uncertain whether the House of Representatives will approve the CARES law in the form adopted by the Senate. However, the House proposals have included an SBA program that is substantially similar to the paycheck protection program, and objections to the CARES Act have generally been related to unemployment benefits and not to the terms of the check protection program. payroll.
This paycheck protection program is separate and in addition to the SBA’s economic disaster loan program (“EIDL“) passed under the Families First Coronavirus Response Act, as described in our Client Alert. Businesses will be able to borrow under the EIDL program and refinance their EIDL loans through Section 7 (a) loans. Paycheck Protection Program. This is a huge loan program and a massive subsidy to small businesses. For context, SBA loans of any type totaled $ 29 billion over the past year. fiscal year 2019.
EXECUTIVE SUMMARY OF THE PAY CHECK PROTECTION PROGRAM
- $ 349 billion in loans authorized under Section 7 (a) of the SBA, to be issued directly by the banks and 100% guaranteed by the SBA.
- Businesses with fewer than 500 full-time or part-time employees will be eligible, with higher employee limits for hotels, restaurants and other industries approved by the SBA.
- No personal guarantees or guarantees.
- The loan amounts will be 2.5 times the average. monthly salary costs, up to a cap of $ 10 million.
- Interest is capped at 4% and principal and deferred interest payments 6 months.
Loans will be canceled for an amount equal to 8 weeks of wages, mortgage, rent and utility expenses, with the amount of the cancellation reduced if staffing or compensation of employees decreases.
The Paycheck Protection Program works as a form of subsidy equal to 2.5 months of salary costs for small businesses. Early indications are that the demand for these loans will be very high, due to financial needs in the current economic climate and favorable loan conditions. The SBA Section 7 (a) loan program has been used as a framework for lending under the Paycheck Protection Program, but many of the traditional limitations of a Section loan 7 (a) have been deleted – for example, lenders would not be required to obtain SBA approval for a credit determination, borrowers will include many businesses that would not generally be “small businesses” eligible for a 7 (a) loan, and there is no personal collateral or collateral requirement. Lenders will be encouraged to issue loans; the SBA will reimburse the processing fee at a rate between 2% and 5% of the principal amount of the loan, the rate depending on the amount of the principal.
Eligible borrowers—Borrowers eligible for Paycheck Protection Program loans include all “businesses” with fewer than 500 employees. All borrowers will be required to have been actively engaged in a business or commercial activity on February 15, 2020 and must be able to demonstrate that the borrower had incurred salary costs or 1,099 payment obligations at that time.
The other types of eligible borrowers are:
- Businesses with more than 500 employees operating primarily in industry NAICS codes starting with 72 (ie.
- Other industries may be subject to employee caps above 500, as determined by the SBA.
- Independent contractors, self-employed or sole proprietorships.
- 501 (c) non-profit.
- Veterans organizations or tribal businesses.
The attribution rules of 13 CFR 121.103 may, in certain circumstances, limit eligibility for these loans to the extent that the “affiliates” of a borrower can be aggregated for the purposes of determining the number of employees of the business. . Affiliates typically include businesses under common control with a borrower, and control can arise from the power to direct the management of the borrower, or in a negative way, as an investor who has the right to prevent a borrower from acting. under the terms of the borrower’s charter, articles of association or other agreements between the owners of the borrower. The attribution rules will not apply to businesses with NAICS codes beginning with 72 (hotels, restaurants, or casinos) or those with existing funding from a small business investment company (“SBIC“).
Loan certificate– Borrowers will not need to show any particular proof of economic necessity to obtain a loan, and the “no credit elsewhere” rules have been lifted for these loans. Borrowers must provide a written certificate of good faith including the following:
- The uncertainty of the current economic conditions makes the loan request necessary to support the ongoing operations of the eligible beneficiary;
- Recognizing that the funds will be used to retain workers and maintain the payroll, or make mortgage payments, lease payments and utility payments; and
- The Eligible Recipient has no outstanding Loan or Loan Application under this paragraph for the same purpose and duplicate amounts.
Eligible loan amount—The maximum loan amount under the Payroll Protection Program is 2.5 times the borrower’s average monthly salary costs, up to a limit of $ 10 million. Average salary costs will be calculated from the one-year period before the loan is granted, except seasonal employers may choose a different trial period. Labor costs include salary, wages, commissions, vacation pay, severance pay, benefits, and state or local taxes, as well as any payment of $ 1,099 to independent contractors not exceeding $ 100,000 per year. . Salary costs exclude compensation to any employee or independent contractor in excess of $ 100,000 per year and any payment to persons who are not residents of the United States.
Uses of borrowed funds– Although loan eligibility is based solely on salary costs, funds can be used to pay employee or contractor compensation (even over $ 100,000), plus mortgage, rent, utility expenses and payments on debts incurred before the date of issue.
Interest and other payment terms—Interest is capped at 4%. Borrowers may defer payments on these loans for the period of six (6) months beginning on the original date. The SBA loan fees have also been waived. Borrowers can choose to refinance any EIDL loan by obtaining a paycheck protection program loan.
Forgiveness-Loans would be canceled for an amount equal to payroll, rent, mortgage interest and utility expenses for the 8-week period beginning at the time of loan origination, up to the total principal amount of the loan. . The forgiven loan amount would be reduced in two circumstances:
- The pardon will be reduced to the extent that (x) the average number of full-time employees of the borrower during the period February 15, 2020 to June 30, 2020 relates to (y) the average number of employees at full time during the period between February 15, 2019 – June 30, 2019 or, if chosen by the borrower, January 1, 2020 – February 29, 2020. The average will be based on the number of employees included in each pay period .
- The pardon will be reduced on a dollar-for-dollar basis by reductions in compensation of more than 25% for any employee earning less than $ 100,000 per year.
Borrowers who have already reduced staff numbers or employee compensation after February 15, 2020 will be able to eliminate the effects of any reduction in loan cancellation eligibility if the number of employees or compensation reductions are reduced to levels from February 15 to June 30, 2020 at the latest.
To obtain the rebate, a borrower will need to provide the following documents:
- Social security tax declarations
- Income tax, payroll and unemployment insurance declarations
- Documentation verifying mortgage, rent, or utility payments, such as canceled check payment receipts, account transcripts, or other documents
The borrower will also certify that the documents provided are true and correct and that the loan proceeds have been used to pay for labor costs, rent, mortgage payments or utilities.